Poorest workers to lose out unless government changes course on in-work support

31 August 2012

More than one million working single parents will be among four million people to lose out from the unintended consequences of two government schemes aimed at supporting low-income working families unless action is taken, warns Gingerbread today.

The lowest earning families and individuals stand to lose out on the equivalent of two-thirds of the intended increase to their untaxed earnings when Universal Credit and the personal tax allowance interact for the first time in 2013.

The discovery was made after Gingerbread commissioned research into the impact of Universal Credit on working single parents once it is introduced in October 2013 (1).

For every £1,000 increase in the personal tax allowance, working people in receipt of Universal Credit will take home the equivalent of just £70, compared with £200 for those not reliant on government financial support.

In three successive budgets the government has increased spending on the personal tax allowance, aimed at helping lower and middle income earners, with the next increase due in April 2013. From October 2013 the welfare system will be overhauled with the introduction of Universal Credit replacing most government financial support, including working tax credits. However, the consequences of these two schemes working together have not been revealed until now.

Gingerbread warns that the majority of the UK’s 1.1 million working single parents, who are disproportionately likely to be in lower paid jobs and therefore reliant on in-work financial support, will be among those to lose out in the ‘unintended consequences’ of these two government policies interacting.

Gingerbread chief executive Fiona Weir said:

“Unless remedial action is taken, those who lose out will be hard working people whose wages still don’t bring in enough to pay for their family’s day to day essentials, including the majority of working single parents. We find it hard to believe that the government would design two schemes to support people into work and lift their families out of poverty and yet have one effectively cancel out two-thirds of the other, but as things stand, the Treasury will be giving with one hand and taking with the other.”

However, there are a number of cost-neutral steps that the government could take to remedy this situation. The simplest would be to increase the earnings disregard in Universal Credit – ensuring that all workers would benefit equally from future rises in the personal tax allowance. The government could also consider reallocating the funds for future tax allowance rises to more targeted measures to support low income working households, such as modifications to Universal Credit.

Fiona Weir added:

“The simplest solution would be to increase the earnings disregard in Universal Credit to give all workers the same benefit from increases to the personal tax allowance. Alternatively, the funds earmarked for growing the personal tax allowance – which amounts to £3.32 billion in 2013-2014 – could be used instead to provide more targeted support for low income working families who are struggling to make ends meet.”

Universal Credit is calculated from individuals’ earnings after tax, so the increase in post-tax income from the personal tax allowance will result in low earners receiving less Universal Credit. At the very least Gingerbread is calling on the government to raise the earnings threshold at which Universal Credit begins to reduce, so that all taxpayers can benefit equally from increases in the tax allowance. Gingerbread is also proposing that the government considers a number of different options for reallocating funds to benefit low income working households in a more targeted way, which could include measures such as:

• Reducing the rate at which Universal Credit is tapered from 65p lost for every pound earned to 62p

• Increasing the percentage of childcare costs covered by the government from 70% to 80%

• Raising the per child allowance in Universal Credit by £300 per year